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Debt and Deficits: Fiscal Analysis with Stationary Ratios

Author

Listed:
  • Campbell, John Y
  • Gao, Can
  • Martin, Ian

Abstract

We introduce a new measure of a government's fiscal position that exploits cointegrating relationships among fiscal variables and output. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that---unlike the debt-GDP ratio---is stationary in the US and the UK since World War II. Fiscal deterioration forecasts a long-run decline in spending rather than increased tax revenue or low returns for bondholders. Fiscal adjustment to tax and spending shocks occurs through mean-reversion in tax and spending growth, with a negligible contribution from debt returns.

Suggested Citation

  • Campbell, John Y & Gao, Can & Martin, Ian, 2023. "Debt and Deficits: Fiscal Analysis with Stationary Ratios," CEPR Discussion Papers 18133, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18133
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    Keywords

    Public debt; Fiscal deficits; Fiscal policy; Government spending;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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